Question

Please, select a product to provide an example exemplifying the difference impact of “fixed costs” and “variable costs” in “pricing.” Explain.

Answer 1

For a firm manufacturing biscuits in a factory,

It will incur two types of costs: fixed and variable

Fixed costs are the costs incurred irrespective of production occurring. This is rent paid for the factory

Variable costs are costs directly related to production process.

This is wages paid to workers

While setting prices, in the short run the firm only takes into account variable costs and focusses only on covering variable costs.

However in the long run, all costs become variable and thus both fixed and variable costs are taken into account to set prices.